Eveready Industries

Investors with a medium-to-long time investment horizon can consider buying the stock of Eveready Industries. With power-hungry rural regions and a rising number of battery-powered gadgets, Eveready Industries, which holds a 51 per cent share of the Indian battery market, has strong growth prospects. At Rs 67 the stock is trading at 10 times its trailing one-year earnings.

The valuation is at a premium to Nippo Batteries which is trading at a PE of 8 times. However, the company's size and prospects justify it. The battery industry, which had fallen prey to rising zinc prices, has shown improved growth on Zinc prices receding from their peaks of last year.

Apart from batteries, Eveready also sells torches, tea and mosquito repellents. The sales mix: 70 per cent batteries, 20 per cent torches, 9 per cent tea and less than one per cent contribution from insect repellents.

The battery business

Eveready manufactures ‘AA, ‘AAA', ‘D' and rechargeable batteries used in electrical appliances and gadgets. Replacement demand for batteries tends to be non- cyclical, but a high exposure to rural markets limits pricing power.

For instance, in November 2006, when zinc prices rose to all time highs ($4,580 per tonne on the LME),price increases by the company met with stiff resistance and battery sales fell by 600 lakh units (5 per cent) in 2006-07; overall margins (operating) dipped six percentage points. The company's enduring efforts towards improving product mix have, however, been strengthening the company's margins since then.

Eveready's battery sales picked up in FY08 (volumes up 12 per cent) with higher market penetration. But sales suffered again in the economic downturn of 2008-09; volumes plunged 8 per cent. Even in the June ended quarter there was a slip in turnover. However, renewed recovery signals are evident now. The September-ended quarter has seen battery sales volumes rise 7 per cent.

New initiatives

Eveready's September quarter sales were up 20 per cent and operating profit margins were up 3 percentage points to 13 per cent.

Eveready had, in April, launched a new class of LED (light emitting diode) lanterns. Pegged as an energy saver, this product has taken off well in the rural areas in the North and East and is replacing kerosene lamps in homes. Eveready's total flashlight sales for the September '09 quarter grew 16 per cent with LED lamp sales alone bringing in Rs 21.33 crore (8 per cent of the total sales). The company's extensive distribution network will help it garner a large pie in this market dominated by unorganised players. The company's lighting division is performing very well with the range of the newly launched GLS (General Lighting Service) lamps; the existing CFL lamps are also witnessing higher demand. The lighting division's sales in the September '09 quarter were Rs 25.30 crore (against Rs 9.42 crore in the same quarter, previous year).

Apart from conventional zinc carbon and alkaline batteries, Eveready is also focussing on developing its rechargeable battery business. It had, in May this year, taken controlling stake in the French rechargeable battery maker Uniross for a consideration of Rs 41.10 crore. With roots in Europe, Uniross has presence across the globe. Eveready already sells batteries, flashlights and mosquito coils under the brand ‘LAVA' in the markets of Sudan, Egypt and Sri Lanka.

Eveready's tea business holds a 5 per cent domestic market share. Sales growth has been flat over the last five years. In the September'09 quarter the segment's turnover was Rs 17 crore against the Rs 20.4 crore in the same quarter last year.

Risks to business

After cooling from the highs of FY07 zinc prices have risen again from their lows; from $1,549/tonne in June to $2,300/tonne now. The prospects for zinc largely depend on how steel offtake shapes up this year, with the recovery in the global economy. However, even if prices do rise from current levels, they may not go back to last year's bubble-driven peaks. An appreciating rupee is a positive for the company as it cuts input costs.

Financials

Eveready's sales have been growing at an annualised rate of 7 per cent in the last five years.

After reporting net losses for two years in sequence in FY07 and FY08, the company returned to profits in FY09 on the cooling-off in input prices and higher price realisations. FY10 can be expected to be a good year for the company with the half-year numbers already showing a 13 per cent increase in sales and operating profits almost doubling.

After tax profits were reported at Rs 40.04 crore against the Rs 5.9 crore in the same period last year.

The current year may also see a one-time cash flow equivalent to Rs 115 crore due to the company transferring its leasehold premises at Navi Mumbai to HDIL.

The income will be shown in the books once the company finishes the formalities. Eveready's debt burden too stands reduced from Rs 401.7 crore in FY08 to Rs 296.39 crore by FY09-end.

Lower interest rates may aid better profitability in the quarters ahead.

via BL